UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Accelerated filer ☐ | ||
Non-accelerated filer ☐ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
CLASS | OUTSTANDING AT OCTOBER 31, 2019 | |
Common Stock, $.01 par value |
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Ingredion Incorporated (“Ingredion”)
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(in millions, except per share amounts) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||
Net sales before shipping and handling costs |
| $ | |
| $ | |
| $ | | $ | | ||
Less: shipping and handling costs | | | | | |||||||||
Net sales | | | | | |||||||||
Cost of sales | | | | | |||||||||
Gross profit | | | | | |||||||||
Operating expenses | | | | | |||||||||
Other income, net | ( | ( | ( | ( | |||||||||
Restructuring/impairment charges | | | | | |||||||||
Operating income | | | | | |||||||||
Financing costs, net | | | | | |||||||||
Other, non-operating expense (income), net | | ( | | ( | |||||||||
Income before income taxes | | | | | |||||||||
Provision for income taxes | | | | | |||||||||
Net income | | | | | |||||||||
Less: Net income attributable to non-controlling interests | | | | | |||||||||
Net income attributable to Ingredion | $ | | $ | | $ | | $ | | |||||
Weighted average common shares outstanding: | |||||||||||||
Basic | | | | | |||||||||
Diluted | | | | | |||||||||
Earnings per common share of Ingredion: | |||||||||||||
Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements
2
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Ingredion Incorporated (“Ingredion”)
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | ||||||||||||
(in millions) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Net income |
| $ | |
| $ | |
| $ | | $ | | ||
Other comprehensive income: | |||||||||||||
Losses on cash flow hedges, net of income tax effect of $ | ( | ( | ( | ( | |||||||||
(Gains) losses on cash flow hedges reclassified to earnings, net of income tax effect of $ —, $ —, $ | ( | | | | |||||||||
Actuarial losses on pension and other postretirement obligations, settlements and plan amendments, net of income tax effect of $ — | ( | — | ( | ( | |||||||||
Unrealized gains on investments, net of income tax effect of $ — | — | ( | — | — | |||||||||
Currency translation adjustment | ( | ( | ( | ( | |||||||||
Comprehensive income | | | | | |||||||||
Less: Comprehensive income attributable to non-controlling interests | | | | | |||||||||
Comprehensive income attributable to Ingredion | $ | | $ | | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements
3
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Ingredion Incorporated (“Ingredion”)
Condensed Consolidated Balance Sheets
September 30, | December 31, | ||||||
(in millions, except share and per share amounts) |
| 2019 |
| 2018 |
| ||
(Unaudited) | |||||||
Assets |
|
| |||||
Current assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Short-term investments | | ||||||
Accounts receivable, net | | | |||||
Inventories | | | |||||
Prepaid expenses | | | |||||
Total current assets | | | |||||
Property, plant and equipment, net of accumulated depreciation of $ | | | |||||
Goodwill | | | |||||
Other intangible assets, net of accumulated amortization of $ | | | |||||
Operating lease assets | | — | |||||
Deferred income tax assets | | | |||||
Other assets | | | |||||
Total assets | $ | | $ | | |||
Liabilities and equity | |||||||
Current liabilities: | |||||||
Short-term borrowings | $ | | $ | | |||
Accounts payable and accrued liabilities | | | |||||
Total current liabilities | | | |||||
Non-current liabilities | | | |||||
Long-term debt | | | |||||
Non-current operating lease liabilities | | — | |||||
Deferred income tax liabilities | | | |||||
Share-based payments subject to redemption | | | |||||
Ingredion stockholders’ equity: | |||||||
Preferred stock — authorized | — | — | |||||
Common stock — authorized | | | |||||
Additional paid-in capital | | | |||||
Less: Treasury stock (common stock: | ( | ( | |||||
Accumulated other comprehensive loss | ( | ( | |||||
Retained earnings | | | |||||
Total Ingredion stockholders’ equity | | | |||||
Non-controlling interests | | | |||||
Total equity | | | |||||
Total liabilities and equity | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements
4
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Ingredion Incorporated (“Ingredion”)
Condensed Consolidated Statements of Equity and Redeemable Equity
(Unaudited)
Total Equity | Share-based | |||||||||||||||||||||
Additional | Accumulated Other | Non- | Payments | |||||||||||||||||||
Common | Paid-In | Treasury | Comprehensive | Retained | Controlling | Subject to | ||||||||||||||||
(in millions) |
| Stock |
| Capital |
| Stock |
| Loss |
| Earnings |
| Interests |
| Redemption |
| |||||||
Balance, December 31, 2018 | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | ||||||||
Net income attributable to Ingredion | | |||||||||||||||||||||
Net income attributable to non-controlling interests | | |||||||||||||||||||||
Dividends declared | ( | ( | ||||||||||||||||||||
Repurchases of common stock, net | | | ||||||||||||||||||||
Share-based compensation, net of issuance | | | ( | |||||||||||||||||||
Other comprehensive loss | ( | ( | ||||||||||||||||||||
Balance, September 30, 2019 | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | |
Total Equity | Share-based |
| ||||||||||||||||||||
Additional | Accumulated Other | Non- | Payments |
| ||||||||||||||||||
Common | Paid-In | Treasury | Comprehensive | Retained | Controlling | Subject to |
| |||||||||||||||
(in millions) |
| Stock |
| Capital |
| Stock |
| Loss |
| Earnings |
| Interests |
| Redemption |
| |||||||
Balance, December 31, 2017 |
| $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | |||||||
Net income attributable to Ingredion | | |||||||||||||||||||||
Net income attributable to non-controlling interests | | |||||||||||||||||||||
Dividends declared | ( | ( | ||||||||||||||||||||
Repurchases of common stock | ( | |||||||||||||||||||||
Share-based compensation, net of issuance | ( | | ( | |||||||||||||||||||
Other comprehensive loss | ( | ( | ||||||||||||||||||||
Other | ( | ( | | ( | ||||||||||||||||||
Balance, September 30, 2018 |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
| $ | |
| $ | |
See Notes to Condensed Consolidated Financial Statements
5
PART I FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
Ingredion Incorporated (“Ingredion”)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended | |||||||
September 30, | |||||||
(in millions) |
| 2019 |
| 2018 | |||
Cash provided by operating activities | |||||||
Net income | $ | | $ | | |||
Non-cash charges to net income: | |||||||
Depreciation and amortization | | | |||||
Mechanical stores expense | | | |||||
Deferred income taxes | | ( | |||||
Other | | | |||||
Changes in working capital: | |||||||
Accounts receivable and prepaid expenses | ( | | |||||
Inventories | ( | ( | |||||
Accounts payable and accrued liabilities | | ( | |||||
Margin accounts | ( | | |||||
Other | | | |||||
Cash provided by operating activities | | | |||||
Cash used for investing activities | |||||||
Capital expenditures and mechanical stores purchases | ( | ( | |||||
Payments for acquisitions, net of cash acquired of $ | ( | — | |||||
Investment in a non-consolidated affiliate | ( | — | |||||
Short-term investments | | | |||||
Other | | | |||||
Cash used for investing activities | ( | ( | |||||
Cash used for financing activities | |||||||
Proceeds from borrowings | | | |||||
Payments on debt | ( | ( | |||||
Repurchases of common stock, net | | ( | |||||
Issuances of common stock for share-based compensation, net of settlements | | ( | |||||
Dividends paid, including to non-controlling interests |
| ( |
| ( | |||
Cash used for financing activities | ( | ( | |||||
Effects of foreign exchange rate changes on cash | ( | ( | |||||
Increase (decrease) in cash and cash equivalents | | ( | |||||
Cash and cash equivalents, beginning of period | | | |||||
Cash and cash equivalents, end of period | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements
6
INGREDION INCORPORATED (“Ingredion”)
Notes to Condensed Consolidated Financial Statements
1. Interim Financial Statements
References to the “Company” are to Ingredion Incorporated (“Ingredion”) and its consolidated subsidiaries. These statements should be read in conjunction with the consolidated financial statements and the related notes to those statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The unaudited Condensed Consolidated Financial Statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 included herein were prepared by management on the same basis as the Company’s audited Consolidated Financial Statements for the year ended December 31, 2018 and reflect all adjustments (consisting solely of normal recurring items unless otherwise noted) which are, in the opinion of management, necessary for the fair presentation of the Condensed Consolidated Statements of Income, Statements of Comprehensive Income, Balance Sheets, Statements of Equity and Redeemable Equity, and Statements of Cash Flows. The results for the interim periods are not necessarily indicative of the results expected for the full years.
2. Summary of Significant Accounting Standards and Policies
For detailed information about the Company’s significant accounting standards, please refer to Note 2 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Except for the items listed below, there have been no other material changes to the Company’s significant accounting policies for the three and nine months ended September 30, 2019.
Recently Adopted Accounting Standards
ASU No. 2016-02, Leases (Topic 842)
In February 2016, the Financial Accounting Standards Board (“FASB”) issued
ASU No. 2017-12 and ASU 2018-16, Derivatives and Hedging (Topic 815)
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This Update modifies accounting guidance for hedge accounting by making more hedge strategies eligible for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess ineffectiveness. The intent is to simplify the application of hedge accounting and increase transparency of information about an entity’s risk management activities. The amended guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The Company completed its assessment of these updates adopted on January 1, 2019, including potential changes to existing hedging arrangements, and determined the adoption of the guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as Benchmark Interest Rate for Hedge Accounting Purposes. This Update permits use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes. The guidance should be adopted on a prospective basis. This Update is effective for fiscal years
7
beginning after December 15, 2018, with early adoption permitted. The Update did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
New Accounting Standards
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This Update simplifies the subsequent measurement of goodwill as the Update eliminates Step 2 from the goodwill impairment test. Instead, under the Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized not to exceed the total amount of goodwill allocated to that reporting unit. This Update is effective for annual periods beginning after December 15, 2019, with early adoption permitted.
Significant Accounting Policies
Indefinite-lived intangible assets and Goodwill: The Company has indefinite-lived intangible assets of $
(in millions) | Balance at September 30, 2019 |
| Balance at December 31, 2018 | ||||
Trademarks/tradenames (indefinite-lived) | $ | |
| $ | |
The original carrying value of goodwill and accumulated impairment charges by reportable business segment at September 30, 2019 was as follows:
North | South | Asia | ||||||||||||||
(in millions) |
| America |
| America |
| Pacific |
| EMEA |
| Total |
| |||||
Goodwill before impairment charges | $ | | $ | | $ | | $ | | $ | | ||||||
Accumulated impairment charges | ( | ( | ( | — | ( | |||||||||||
Balance at January 1, 2019 | | | | | | |||||||||||
Acquisitions | | — | — | — | | |||||||||||
Currency translation | — | ( | | ( | ( | |||||||||||
Balance at September 30, 2019 | $ | | $ | | $ | | $ | | $ | |
The Company assesses indefinite-lived intangible assets and goodwill for impairment annually (or more frequently if impairment indicators arise). The Company performs this annual impairment assessment as of July 1 each year. In testing indefinite-lived intangible assets for impairment, the Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is impaired. After assessing the qualitative factors, if the Company determines that it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is greater than its carrying amount, then it would not be required to compute the fair value of the indefinite-lived intangible asset. In the event the qualitative assessment leads the Company to conclude otherwise, then it would be required to determine the fair value of the indefinite-lived intangible assets and perform a quantitative impairment test in accordance with Accounting Standards Codification (“ASC”) subtopic 350-30. In performing the qualitative analysis, the Company considers various factors including net sales derived from these intangibles and certain market and industry conditions. Based on the results of its assessment, the Company concluded that as of July 1, 2019, there were
In testing goodwill for impairment, the Company first assesses qualitative factors in determining whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. After assessing the qualitative factors, if the Company determines that it is more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount then the Company does not perform the two-step impairment test. If the Company concludes otherwise, then it performs the first step of the two-step impairment test as described in ASC Topic 350. In the first step (“Step One”), the fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit exceeds the carrying value of its net assets, goodwill is not considered impaired and no further testing is required. If the carrying value
8
of the net assets exceeds the fair value of the reporting unit, a second step (“Step Two”) of the impairment assessment is performed in order to determine the implied fair value of a reporting unit's goodwill. Determining the implied fair value of goodwill requires a valuation of the reporting unit's tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of its goodwill, goodwill is deemed impaired and is written down to the extent of the difference. Based on the results of the annual assessment, the Company concluded that as of July 1, 2019, there were
3. Acquisitions
On March 1, 2019, the Company completed its acquisition of Western Polymer LLC (“Western Polymer”), a privately-held, U.S.-based company headquartered in Moses Lake, Washington, that produces native and modified potato starches for industrial and food applications for $
A preliminary allocation of the purchase price to the assets acquired and liabilities assumed was made based on available information and incorporating management’s best estimates. The assets acquired and liabilities assumed in the transaction are generally recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition are expensed as incurred. As of September 30, 2019, $
Pro-forma results of operations for the acquisition made in 2019 have not been presented as the effect of the acquisition would not be material to the Company’s results of operations for any periods presented.
The Company incurred $
4. Revenue Recognition
The Company applies the provisions of ASC 606-10, Revenue from Contracts with Customers. The Company recognizes revenue under the core principle to depict the transfer of products to customers in an amount reflecting the consideration the Company expects to receive. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.
The Company identified customer purchase orders, which in some cases are governed by a master sales agreement, as the contracts with its customers. For each contract, the Company considers the transfer of products, each of which is distinct, to be the identified performance obligation. In determining the transaction price for the performance obligation, the Company evaluates whether the price is subject to adjustment to determine the consideration to which the Company expects to be entitled. The pricing model can be fixed or variable within the contract. The variable pricing model is based on historical commodity pricing and is determinable prior to completion of the performance obligation. Additionally, the Company has certain sales adjustments for volume incentive discounts and other discount arrangements that reduce the transaction price. The reduction of the transaction price is estimated using the expected value method based on an analysis of historical volume incentives or discounts, over a period of time considered adequate to account for current pricing and business trends. Historically, actual volume incentives and discounts relative to those estimated and included when determining the transaction price have not materially differed. Volume incentives and discounts are accrued at the satisfaction of the performance obligation and accounted for in Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets. These amounts are not significant as of September 30, 2019 or December 31, 2018. The product price as specified in the contract, net of any discounts, is considered the standalone selling price as it is an
9
observable input which depicts the price as if sold to a similar customer in similar circumstances. Payment is received shortly after the performance obligation is satisfied; therefore, the Company has elected the practical expedient under ASC 606-10-32-18 to not assess whether a contract has a significant financing component.
Revenue is recognized when the Company’s performance obligation is satisfied and control is transferred to the customer, which occurs at a point in time, either upon delivery to an agreed upon location or to the customer. Further, in determining whether control has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer.
Shipping and handling activities related to contracts with customers represent fulfillment costs and are presented as a reduction of net sales. Taxes assessed by governmental authorities and collected from customers are accounted for on a net basis and excluded from revenues. The Company applies a practical expedient to expense costs to obtain a contract as incurred as most contracts are
From time to time, the Company may enter into long-term contracts with its customers. Historically, the contracts entered into by the Company do not result in significant contract assets or liabilities. Any such arrangements are accounted for in Other assets or Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets. There were no significant contract assets or liabilities as of September 30, 2019 or December 31, 2018.
The Company is principally engaged in the production and sale of starches and sweeteners for a wide range of industries, and is managed geographically on a regional basis. The Company’s operations are classified into
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(in millions) |
| 2019 |
| 2018 | 2019 |
| 2018 |
| |||||
Net sales to unaffiliated customers: | |||||||||||||
North America: | |||||||||||||
Net sales before shipping and handling costs | $ | | $ | | $ | | $ | | |||||
Less: shipping and handling costs | | | | | |||||||||
Net sales | $ | | $ | | $ | | $ | | |||||
South America: | |||||||||||||
Net sales before shipping and handling costs | $ | | $ | | $ | | $ | | |||||
Less: shipping and handling costs | | | | | |||||||||
Net sales | $ | | $ | | $ | | $ | | |||||
Asia-Pacific: | |||||||||||||
Net sales before shipping and handling costs | $ | | $ | | $ | | $ | | |||||
Less: shipping and handling costs | | | | | |||||||||
Net sales | $ | | $ | | $ | | $ | | |||||
EMEA: | |||||||||||||
Net sales before shipping and handling costs | $ | | $ | | $ | | $ | | |||||
Less: shipping and handling costs | | | | | |||||||||
Net sales | $ | | $ | | $ | | $ | |
5. Restructuring and Impairment Charges
For the three and nine months ended September 30, 2019, the Company recorded $
10
related severance for the three and nine months ended September 30, 2019, respectively. These charges were recorded primarily in the Company’s North America and South America operations, and include $
Additionally, for the three and nine months ended September 30, 2019, the Company recorded $
For the three and nine months ended September 30, 2018, the Company recorded $
A summary of the Company’s employee-related severance accrual as of September 30, 2019 is as follows (in millions):
Balance in severance accrual as of December 31, 2018 |
| $ | | |
Cost Smart cost of sales and SG&A | | |||
Payments made to terminated employees | ( | |||
Foreign exchange translation | ( | |||
Balance in severance accrual as of September 30, 2019 |
| $ | |
Of the $
6. Financial Instruments, Derivatives and Hedging Activities
The Company is exposed to market risk stemming from changes in commodity prices (primarily corn and natural gas), foreign currency exchange rates and interest rates. In the normal course of business, the Company actively manages its exposure to these market risks by entering into various hedging transactions, authorized under established policies that place controls on these activities. These transactions utilize exchange-traded derivatives or over-the-counter derivatives with investment-grade counterparties. Derivative financial instruments currently used by the Company consist of commodity-related futures, options and swap contracts, foreign currency-related forward contracts and interest rate swaps.
Commodity price hedging: The Company’s principal use of derivative financial instruments is to manage commodity price risk relating to anticipated purchases of corn and natural gas to be used in the manufacturing process, generally over the next
11
For example, the manufacturing of the Company’s products requires a significant volume of corn and natural gas. Price fluctuations in corn and natural gas cause the actual purchase price of corn and natural gas to differ from anticipated prices.
To manage price risk related to corn purchases, the Company uses corn futures and option contracts that trade on regulated commodity exchanges to lock-in corn costs associated with fixed-priced customer sales contracts. The Company uses over-the-counter natural gas swaps to hedge a portion of its natural gas usage. These derivative financial instruments limit the impact that volatility resulting from fluctuations in market prices will have on corn and natural gas purchases. The majority of corn derivatives have been designated as cash flow hedging instruments. The Company also enters into futures contracts to hedge price risk associated with fluctuations in the market price of ethanol and soybean oil. The Company’s natural gas, ethanol and soybean oil derivatives have been designated as cash flow hedging instruments.
The Company enters into certain corn derivative instruments that are not designated as hedging instruments as defined by ASC 815, Derivatives and Hedging. Therefore, the realized and unrealized gains and losses from these instruments are recognized in cost of sales during each accounting period. These derivative instruments also mitigate commodity price risk related to anticipated purchases of corn.
For commodity hedges designated as cash flow hedges, unrealized gains and losses associated with marking the commodity hedging contracts to market (fair value) are recorded as a component of other comprehensive income (“OCI”) and included in the equity section of the Condensed Consolidated Balance Sheets as part of accumulated other comprehensive income/loss (“AOCI”). These amounts are subsequently reclassified into earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings, or in the month a hedge is determined to be ineffective. The Company assesses the effectiveness of a commodity hedge contract based on changes in the contract’s fair value. The changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in the price of the hedged items. Gains and losses from cash flow hedging instruments reclassified from AOCI to earnings are reported as Cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.
As of September 30, 2019, AOCI included $
Interest rate hedging: The Company assesses its exposure to variability in interest rates by identifying and monitoring changes in interest rates that may adversely impact future cash flows and the fair value of existing debt instruments, and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company’s outstanding and forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including sensitivity analysis, to estimate the expected impact of changes in interest rates on future cash flows and the fair value of the Company’s outstanding and forecasted debt instruments. Derivative financial instruments that have been used by the Company to manage its interest rate risk consist of interest rate swaps and Treasury lock agreements (“T-Locks”).
The Company has an interest rate swap agreement that effectively converts the interest rates on $
12
The Company periodically enters into T-Locks to hedge its exposure to interest rate changes. The T-Locks are designated as hedges of the variability in cash flows associated with future interest payments caused by market fluctuations in the benchmark interest rate until the fixed interest rate is established, and are accounted for as cash flow hedges. Accordingly, changes in the fair value of the T-Locks are recorded to AOCI until the consummation of the underlying debt offering, at which time any realized gain (loss) is amortized to earnings over the life of the debt. The Company did not have any T-Locks outstanding as of September 30, 2019 or December 31, 2018. As of September 30, 2019, AOCI included $
Foreign currency hedging: Due to its global operations, including operations in many emerging markets, the Company is exposed to fluctuations in foreign currency exchange rates. As a result, the Company has exposure to translational foreign-exchange risk when the results of its foreign operations are translated to U.S. dollars and to transactional foreign-exchange risk when transactions not denominated in the functional currency are revalued. The Company primarily uses derivative financial instruments such as foreign currency forward contracts, swaps and options to manage its transactional foreign-exchange risk. The Company enters into foreign currency derivative instruments that are designated as both cash flow hedging instruments as well as instruments not designated as hedging instruments as defined by ASC 815, Derivatives and Hedging, in order to mitigate transactional foreign-exchange risk.
Gains and losses from derivative financial instruments not designated as hedging instruments are marked to market in earnings during each accounting period. The notional value of the Company’s foreign currency derivatives not designated as hedging instruments included forward sales contracts of $
The Company’s foreign currency derivatives designated as cash flow hedging instruments include $
The fair value and balance sheet location of the Company’s derivative instruments, presented gross in the Condensed Consolidated Balance Sheets, are reflected below:
Fair Value of Hedging Instruments as of September 30, 2019 | |||||||||||||||||||||||||
Designated Hedging Instruments (in millions) | Non-Designated Hedging Instruments (in millions) | ||||||||||||||||||||||||
Balance Sheet Location | Commodity Contracts | Foreign Currency Contracts | Interest Rate Contracts | Total | Commodity Contracts | Foreign Currency Contracts | Interest Rate Contracts | Total | |||||||||||||||||
Accounts receivable, net | $ | | $ | | $ | — | $ | | $ | | $ | | $ | — | $ | | |||||||||
Other assets | — | | | | — | | — | | |||||||||||||||||
Assets | | | | |
| | | — | | ||||||||||||||||
Accounts payable and accrued liabilities | | | — | | | | — | | |||||||||||||||||
Non-current liabilities | | | — | | — | | — | | |||||||||||||||||
Liabilities | | | — | | | | — | | |||||||||||||||||
Net (Liabilities)/Assets | $ | ( | $ | | $ | | $ | ( | $ | | $ | | $ | — | $ | |
13
Fair Value of Hedging Instruments as of December 31, 2018 | |||||||||||||||||||||||||
Designated Hedging Instruments (in millions) | Non-Designated Hedging Instruments (in millions) | ||||||||||||||||||||||||
Balance Sheet Location | Commodity Contracts | Foreign Currency Contracts | Interest Rate Contracts | Total | Commodity Contracts | Foreign Currency Contracts | Interest Rate Contracts | Total | |||||||||||||||||
Accounts receivable, net | $ | | $ | | $ | — | $ | | $ | — | $ | | $ | — | $ | | |||||||||
Other assets | | — | — | | — | | — | | |||||||||||||||||
Assets | | | — | |
| — | | — | | ||||||||||||||||
Accounts payable and accrued liabilities | | — | — | | | | — | | |||||||||||||||||
Non-current liabilities | | — | | | — | | — | | |||||||||||||||||
Liabilities | | — | | | | | — | | |||||||||||||||||
Net (Liabilities)/Assets | $ | ( | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | — | $ | |
As of September 30, 2019, the Company had outstanding futures and option contracts that hedged the forecasted purchase of approximately
Additional information pertaining to the Company’s fair value hedges is presented below:
Line item in the statement of financial position in which the hedged item is included (in millions) | Carrying Amount of the Hedged Assets/(Liabilities) | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of Hedged Assets/(Liabilities) | |||||||||||
Balance sheet date as of | September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||
Interest Rate Contracts: | |||||||||||||
Long-Term Debt | $ | ( | $ | ( | $ | ( | $ | |
Additional information relating to the Company’s derivative instruments is presented below:
Location of Gains | |||||||||||||||
Amount of Gains (Losses) | (Losses) | Amount of Gains (Losses) | |||||||||||||
Derivatives in Cash-Flow | Recognized in OCI | Reclassified from | Reclassified from AOCI into Income | ||||||||||||
Hedging Relationships | Three Months Ended September 30, | AOCI | Three Months Ended September 30, | ||||||||||||
(in millions, pre-tax) |
| 2019 |
| 2018 |
| into Income |
| 2019 |
| 2018 | |||||
Commodity contracts | $ | ( | $ | ( | Cost of sales | $ | | $ | ( | ||||||
Foreign currency contracts | | | Net sales/Cost of sales | | — | ||||||||||
Interest rate contracts | — | — | Financing costs, net | — | — | ||||||||||
Total | $ | ( | $ | ( | $ | | $ | ( |
Location of Gains | |||||||||||||||
Amount of Gains (Losses) | (Losses) | Amount of Gains (Losses) | |||||||||||||
Derivatives in Cash-Flow | Recognized in OCI | Reclassified from | Reclassified from AOCI into Income | ||||||||||||
Hedging Relationships | Nine Months Ended September 30, | AOCI | Nine Months Ended September 30, | ||||||||||||
(in millions, pre-tax) |
| 2019 |
| 2018 |
| into Income |
| 2019 |
| 2018 | |||||
Commodity contracts | $ | ( | $ | ( | Cost of sales | $ | ( | $ | ( | ||||||
Foreign currency contracts | | | Net sales/Cost of sales | ( | | ||||||||||
Interest rate contracts | — | — | Financing costs, net | ( | ( | ||||||||||
Total | $ | ( | $ | ( | $ | ( | $ | ( |
14
For the Three Months Ended September 30, 2019 | For the Three Months Ended September 30, 2018 | ||||||||||||||||||
Location and Amount of Gains (Losses) Recognized in Income on Fair Value and Cash Flow Hedging Relationships (in millions, pre-tax) | Net sales before shipping and handling costs | Cost of Sales | Financing costs, net | Net sales before shipping and handling costs | Cost of Sales | Financing costs, net | |||||||||||||
Income (expense) reported in earnings | $ | | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||||
Fair value hedging relationships: | |||||||||||||||||||
Interest Rate Contracts: | |||||||||||||||||||
Hedged Items | $ | — | $ | — | $ | — | $ | — | $ | — | $ | | |||||||
Derivatives designated as hedging instruments | — | — | — | — | — | ( | |||||||||||||
Cash flow hedging relationships: | |||||||||||||||||||
Commodity Contracts: | |||||||||||||||||||
Gains (losses) reclassified from other comprehensive income into earnings | $ | — | $ | | $ | — | $ | — | $ | ( | $ | — | |||||||
Foreign Exchange Contracts: | |||||||||||||||||||
Gains reclassified from other comprehensive income into earnings | | — | — | — | — | — | |||||||||||||
Interest Rate Contracts: | |||||||||||||||||||
Gains (losses) reclassified from other comprehensive income into earnings | — | — | — | — | — | — |
For the Nine Months Ended September 30, 2019 | For the Nine Months Ended September 30, 2018 | ||||||||||||||||||
Location and Amount of Gains (Losses) Recognized in Income on Fair Value and Cash Flow Hedging Relationships (in millions, pre-tax) | Net sales before shipping and handling costs | Cost of Sales | Financing costs, net | Net sales before shipping and handling costs | Cost of Sales | Financing costs, net | |||||||||||||
Income (expense) reported in earnings | $ | | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||||
Fair value hedging relationships: | |||||||||||||||||||
Interest Rate Contracts: | |||||||||||||||||||
Hedged Items | $ | — | $ | — | $ | ( | $ | — | $ | — | $ | | |||||||
Derivatives designated as hedging instruments | — | — | | — | — | ( | |||||||||||||
Cash flow hedging relationships: | |||||||||||||||||||
Commodity Contracts: | |||||||||||||||||||
Losses reclassified from other comprehensive income into earnings | $ | — | $ | ( | $ | — | $ | — | $ | ( | $ | — | |||||||
Foreign Exchange Contracts: | |||||||||||||||||||
(Losses) gains reclassified from other comprehensive income into earnings | ( | | — | | ( | — | |||||||||||||
Interest Rate Contracts: | |||||||||||||||||||
Losses reclassified from other comprehensive income into earnings | — | — | ( | — | — | ( |
15
As of September 30, 2019, AOCI included $
Presented below are the fair values of the Company’s financial instruments and derivatives for the periods presented:
As of September 30, 2019 | As of December 31, 2018 | ||||||||||||||||||||||||
(in millions) |
| Total |
| Level 1 (a) |
| Level 2 (b) |
| Level 3 (c) |
| Total |
| Level 1 (a) |
| Level 2 (b) |
| Level 3 (c) |
| ||||||||
Available for sale securities | $ | | $ | | $ | — | $ | — | $ | | $ | | $ | — | $ | — | |||||||||
Derivative assets | | | | — | | | | — | |||||||||||||||||
Derivative liabilities | | | | — | | | | — | |||||||||||||||||
Long-term debt | | — | | — | | — | | — |
(a) | Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets or liabilities. |
(b) | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability or can be derived principally from or corroborated by observable market data. |
(c) | Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
The carrying values of cash equivalents, short-term investments, accounts receivable, accounts payable and short-term borrowings approximate fair values. Commodity futures, options and swap contracts are recognized at fair value. Foreign currency forward contracts, swaps and options are also recognized at fair value. The fair value of the Company’s Long-term debt is estimated based on quotations of major securities dealers who are market makers in the securities. As of September 30, 2019, the carrying value and fair value of the Company’s Long-term debt was $
7. Debt
As of September 30, 2019 and December 31, 2018, the Company’s total debt consisted of the following:
As of | As of | ||||||
(in millions) | September 30, 2019 | December 31, 2018 | |||||
$ | | $ | | ||||
| | ||||||
| | ||||||
| | ||||||
Term loan credit agreement due April 25, 2019 | — | | |||||
Term loan credit agreement due April 12, 2021 | | — | |||||
Revolving credit facility | | | |||||
Fair value adjustment related to hedged fixed rate debt instruments | | ( | |||||
Long-term debt | | | |||||
Short-term borrowings | | | |||||
Total debt | $ | | $ | |
On April 12, 2019, the Company amended and restated the Term Loan Credit Agreement that was set to mature on April 25, 2019 (“Term Loan”) of $
16
intent to refinance such senior notes on a long-term basis using the Revolving Credit Facility or other sources prior to the maturity date.
8. Leases
The Company determines if an arrangement is a lease at inception of the agreement. Operating leases are included in operating lease assets, and current and non-current operating lease liabilities in the Company’s Condensed Consolidated Balance Sheets. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease asset value includes in its calculation any prepaid lease payments made and any lease incentives received from the arrangement as a reduction of the asset. The Company’s lease terms may include options to extend or terminate the lease, and the impact of these options are included in the lease liability and lease asset calculations when the exercise of the option is at the Company’s sole discretion and it is reasonably certain that the Company will exercise that option. The Company will not separate lease and non-lease components for its leases when it is impracticable to separate the two, such as leases with variable payment arrangements. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Company has operating leases for certain rail cars, office space, warehouses, and machinery and equipment. The commencement date used for the calculation of the lease obligations recorded is the latter of the commencement date of the new standard (January 1, 2019) or the lease start date. Certain of the leases have options to extend the life of the lease, which are included in the liability calculation when the option is at the sole discretion of the Company and it is reasonably certain that the Company will exercise the option. The Company has certain leases that have variable payments based solely on output or usage of the leased asset. These variable operating lease assets are excluded from the Company’s balance sheet presentation and expensed as incurred. The Company currently has
Lease expense for lease payments is recognized on a straight-line basis over the lease term. The components of lease expense were as follows:
Lease Cost | Three Months Ended September 30, | Nine Months Ended September 30, | |||||
(in millions) |
| 2019 |
| 2019 | |||
Operating lease cost | $ | | $ | | |||
Variable operating lease cost | | | |||||
Short term lease cost | | | |||||
Lease cost | $ | | $ | |
The following is a reconciliation of future undiscounted cash flows to the operating lease liabilities and the related operating lease assets as presented on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2019.
Operating Leases | As of | |||
(in millions) | September 30, 2019 | |||
2019 (Excluding the nine months ended September 30, 2019) | $ | | ||
2020 | | |||
2021 | | |||
2022 | | |||
2023 | | |||
Thereafter | | |||
Total future lease payments | | |||
Less imputed interest | | |||
Present value of future lease payments | | |||
Less current lease liabilities | ||||
Non-current operating lease liabilities | $ | | ||
Operating lease assets | $ | |
17
Additional information related to the Company’s operating leases is listed below. The right-of-use assets obtained in exchange for lease liabilities for the nine months ended September 30, 2019 includes the initial recognition of $
Other Information | Three Months Ended September 30, | Nine Months Ended September 30, | |||||
($ in millions) | 2019 |
| 2019 |
| |||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||
Operating cash flows from operating leases | $ | | $ | | |||
Right-of-use assets obtained in exchange for lease liabilities: | |||||||
Operating leases | $ | | $ | | |||
As of | |||||||
September 30, 2019 | |||||||
Weighted average remaining lease term: | |||||||
Operating leases | |||||||
Weighted average discount rate: | |||||||
Operating leases | | % |
As the Company has not restated prior-year information for its adoption of ASC Topic 842, the following presents its future minimum lease payments for operating leases under ASC Topic 840 on December 31, 2018:
Operating Leases | As of | |||
(in millions) | December 31, 2018 | |||
2019 | $ | | ||
2020 | | |||
2021 | | |||
2022 | | |||
2023 | | |||
Thereafter | | |||
Total future lease payments | $ | |
9. Taxes
In January 2019, the Company’s Brazilian subsidiary received a favorable decision from the Federal Court of Appeals in Sao Paulo, Brazil, related to certain indirect taxes collected in prior years. As a result of this decision, the Company expects to be entitled to credits against various Brazilian federal tax payments in 2019 and future years. The Company is finalizing the calculation of the amount of the credits and interest related to this court decision, as well as the corresponding tax expense. The credit calculations, which span a period from 2005 to April 2018, are complex and subject to pending decisions within the Brazilian courts that may result in changes to the calculations and the timing of the receipt of benefits. When the Company finalizes the credit calculations and records the gain, a one-time tax payment on the total credit and interest recognized will become immediately due.
10. Net Periodic Pension and Postretirement Benefit Costs
The following table sets forth the components of net periodic cost/(benefit) of the U.S. and non-U.S. defined benefit pension plans for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
(in millions) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||||
Service cost | $ | $ | $ | — | $ | $ | $ | $ | $ | ||||||||||||||||
Interest cost | |||||||||||||||||||||||||
Expected return on plan assets | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||
Amortization of actuarial loss | — | — | — | — | — | — | | | |||||||||||||||||
Net periodic benefit cost/(benefit) (a) | $ | | $ | ( | $ | | $ | $ | | $ | ( | $ | | $ |
The Company currently anticipates that it will make approximately $
18
months ended September 30, 2019, cash contributions of approximately $
The following table sets forth the components of net postretirement benefit cost for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
(in millions) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||
Service cost | $ | — | $ | | $ | — | $ | | |||||
Interest cost | | — | | | |||||||||
Amortization of prior service credit | — | — | ( | ( | |||||||||
Net periodic benefit cost (a) | $ | | $ | | $ | | $ | |
(a) | The service cost component of net periodic benefit cost is presented within either cost of sales or operating expenses on the Condensed Consolidated Statements of Income. The interest cost, expected return on plan assets, amortization of actuarial loss and amortization of prior service credit components of net periodic benefit cost are presented as other, non-operating income on the Condensed Consolidated Statements of Income. |
11. Inventories
Inventories are summarized as follows:
As of | As of |
| |||||
(in millions) |
| September 30, 2019 |
| December 31, 2018 |
| ||
Finished and in process |
| $ | |
| $ | | |
Raw materials |
| |
| | |||
Manufacturing supplies and other |
| |
| | |||
Total inventories |
| $ | |
| $ | |
12. Equity
Treasury stock: On October 22, 2018, the Board of Directors authorized a new stock repurchase program permitting the Company to purchase up to
On November 5, 2018, the Company entered into a Variable Timing Accelerated Share Repurchase (“ASR”) program with JPMorgan (“JPM”). Under the ASR program, the Company paid $
19
Shared-based payments: The following table summarizes the components of the Company’s share-based compensation expense:
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(in millions) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Stock options: | |||||||||||||
Pre-tax compensation expense |
| $ | — |
| $ | |
| $ | | $ | | ||
Income tax benefit |
| — |
| — |
| — |
| ( | |||||
Stock option expense, net of income taxes |
| — |
| |
| |
| | |||||
Restricted stock units ("RSUs"): | |||||||||||||
Pre-tax compensation expense |
| |
| |
| |
| | |||||
Income tax benefit |
| — |
| ( |
| ( |
| ( | |||||
RSUs, net of income taxes |
| |
| |
| |
| | |||||
Performance shares and other share-based awards: | |||||||||||||
Pre-tax compensation expense |
| |
| — |
| |
| | |||||
Income tax benefit |
| — |
| ( |
| — |
| ( | |||||
Performance shares and other share-based compensation expense, net of income taxes |
| |
| ( |
| |
| | |||||
Total share-based compensation: | |||||||||||||
Pre-tax compensation expense |
| |
| |
| |
| | |||||
Income tax benefit |
| — |
| ( |
| ( |
| ( | |||||
Total share-based compensation expense, net of income taxes |
| $ | |
| $ | |
| $ | | $ | |
Stock Options: Under the Company’s stock incentive plan, stock options are granted at exercise prices that equal the market value of the underlying common stock on the date of grant. The options have a
The Company granted non-qualified options to purchase
Nine Months Ended September 30, | |||||||
| 2019 | 2018 | |||||
Expected life (in years) | |||||||
Risk-free interest rate | | % | | % | |||
Expected volatility | | % | | % | |||
Expected dividend yield | | % | | % |
The expected life of options represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the grant date for the period corresponding to the expected life of the options. Expected volatility is based on historical volatilities of the Company’s common stock. Dividend yield is based on current dividend payments at the date of grant.
20
Stock option activity for the nine months ended September 30, 2019 was as follows:
| Number of Options (in thousands) |
| Weighted Average Exercise Price per Share |
| Average Remaining Contractual Term (Years) |
| Aggregate Intrinsic Value (in millions) |
| |||
Outstanding as of December 31, 2018 |
| |
| $ | | $ | | ||||
Granted |
| | | ||||||||
Exercised |
| ( | | ||||||||
Cancelled |
| ( | | ||||||||
Outstanding as of September 30, 2019 |
| | $ | |
|
| $ | | |||
Exercisable as of September 30, 2019 |
| | $ | |
|
| $ | |
For the nine months ended September 30, 2019, cash received from the exercise of stock options was $
Additional information pertaining to stock option activity is as follows:
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(dollars in millions, except per share) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Weighted average grant date fair value of stock options granted (per share) | $ | — | $ | — | $ | | $ | | |||||
Total intrinsic value of stock options exercised | $ | | $ | | $ | | $ | |
Restricted Stock Units: The Company has granted RSUs to certain key employees. The RSUs are subject to cliff vesting, generally after
The following table summarizes RSU activity for the nine months ended September 30, 2019:
(RSUs in thousands) |
| Number of Restricted Shares |
| Weighted Average Fair Value per Share | ||
Non-vested as of December 31, 2018 | | $ | ||||
Granted | | |||||
Vested | ( | |||||
Cancelled | ( | |||||
Non-vested as of September 30, 2019 | | $ |
As of September 30, 2019, the total remaining unrecognized compensation cost related to RSUs was $
Performance Shares: The Company has a long-term incentive plan for senior management in the form of performance shares. Historically these performance shares vested based solely on the Company’s total shareholder return as compared to the total shareholder return of its peer group over the
For the 2019 performance shares awarded based on the Company’s total shareholder return, the number of shares that ultimately vest can range from
21
of the
For the 2019 performance shares awarded based on ROIC, the number of shares that ultimately vest can range from
For the nine months ended September 30, 2019, the Company awarded
As of September 30, 2019, the unrecognized compensation cost related to these awards was $
The 2016 performance share awards vested in the first quarter of 2019, achieving a
Accumulated Other Comprehensive Loss: The following is a summary of net changes in Accumulated other comprehensive loss by component and net of tax for the nine months ended September 30, 2019 and 2018:
(in millions) |
| Cumulative Translation Adjustment |
| Deferred (Loss) Gain on Hedging Activities |
| Pension and Postretirement Adjustment |
| Unrealized (Loss) Gain on Investment |
| Accumulated Other Comprehensive Loss |
| |||||
Balance, December 31, 2018 | $ | ( | $ | ( | $ | ( | $ | — | $ | ( | ||||||
Other comprehensive loss before reclassification adjustments | ( | ( | ( | — | ( | |||||||||||
Amount reclassified from accumulated OCI | — | | — | — | | |||||||||||
Tax benefit | — | | — | — | | |||||||||||
Net other comprehensive loss | ( | ( | ( | — | ( | |||||||||||
Balance, September 30, 2019 | $ | ( | $ | ( | $ | ( | $ | — | $ | ( |
(in millions) |
| Cumulative Translation Adjustment |
| Deferred (Loss) Gain on Hedging Activities |
| Pension and Postretirement Adjustment |
| Unrealized (Loss) Gain on Investment |
| Accumulated Other Comprehensive Loss |
| |||||
Balance, December 31, 2017 | $ | ( | $ | ( | $ | ( | $ | | $ | ( | ||||||
Other comprehensive loss before reclassification adjustments | ( | ( | ( | — | ( | |||||||||||
Amount reclassified from accumulated OCI | — | | — | — | | |||||||||||
Adoption of ASU 2016-01 | — | — | — | ( | ( | |||||||||||
Adoption of ASU 2018-02 | — | ( | ( | — | ( | |||||||||||
Tax provision | — | ( | — | — | ( | |||||||||||
Net other comprehensive (loss) income | ( | | ( | ( | ( | |||||||||||
Balance, September 30, 2018 | $ | ( | $ | ( | $ | ( | $ | — | $ | ( |
22
Supplemental Information: The following Condensed Consolidated Statements of Equity and Redeemable Equity provide the dividends per share for common stock for the periods presented:
Total Equity | Share-based | |||||||||||||||||||||
Additional | Accumulated Other | Non- | Payments | |||||||||||||||||||
Common | Paid-In | Treasury | Comprehensive | Retained | Controlling | Subject to | ||||||||||||||||
(in millions) |
| Stock |
| Capital |
| Stock |
| Loss |
| Earnings |
| Interests |
| Redemption |
| |||||||
Balance, December 31, 2018 | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | ||||||||
Net income attributable to Ingredion | | |||||||||||||||||||||
Net income attributable to non-controlling interests | | |||||||||||||||||||||
Dividends declared, common stock ($0.625/share) | ( | |||||||||||||||||||||
Repurchases of common stock | | | ||||||||||||||||||||
Share-based compensation, net of issuance | | | ( | |||||||||||||||||||
Other comprehensive loss | ( | |||||||||||||||||||||
Balance, March 31, 2019 | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | ||||||||
Net income attributable to Ingredion | | |||||||||||||||||||||
Net income attributable to non-controlling interests | | |||||||||||||||||||||
Dividends declared, common stock ($0.625/share) | ( | |||||||||||||||||||||
Dividends declared, non-controlling interests | ( | |||||||||||||||||||||
Share-based compensation, net of issuance | | | | |||||||||||||||||||
Other comprehensive income (loss) | | ( | ||||||||||||||||||||
Balance, June 30, 2019 | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | ||||||||
Net income attributable to Ingredion | | |||||||||||||||||||||
Net income attributable to non-controlling interests | | |||||||||||||||||||||
Dividends declared, common stock ($0.63/share) | ( | |||||||||||||||||||||
Dividends declared, non-controlling interests | ( | |||||||||||||||||||||
Share-based compensation, net of issuance | ( | | | |||||||||||||||||||
Other comprehensive (loss) income | ( | | ||||||||||||||||||||
Balance, September 30, 2019 | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | |
23
Total Equity | Share-based |
| ||||||||||||||||||||
Additional | Accumulated Other | Non- | Payments |
| ||||||||||||||||||
Common | Paid-In | Treasury | Comprehensive | Retained | Controlling | Subject to |
| |||||||||||||||
(in millions) |
| Stock |
| Capital |
| Stock |
| Loss |
| Earnings |
| Interests |
| Redemption |
| |||||||
Balance, December 31, 2017 |
| $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | |||||||
Net income attributable to Ingredion |
| | ||||||||||||||||||||
Net income attributable to non-controlling interests |
| | ||||||||||||||||||||
Dividends declared, common stock ($0.60/share) |
| ( |
| |||||||||||||||||||
Dividends declared, non-controlling interests | ( | |||||||||||||||||||||
Share-based compensation, net of issuance | ( | | ( | |||||||||||||||||||
Other comprehensive income (loss) |
| | ( | |||||||||||||||||||
Balance, March 31, 2018 | $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
| $ | |
| $ | | ||
Net income attributable to Ingredion | | |||||||||||||||||||||
Net income attributable to non-controlling interests | | |||||||||||||||||||||
Dividends declared, common stock ($0.60/share) | ( | |||||||||||||||||||||
Dividends declared, non-controlling interests | ( | |||||||||||||||||||||
Repurchase of common stock | ( | |||||||||||||||||||||
Share-based compensation, net of issuance | | | ||||||||||||||||||||
Other comprehensive loss | ( | ( | ||||||||||||||||||||
Other | ( | ( | ||||||||||||||||||||
Balance, June 30, 2018 | $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
| $ | |
| $ | | ||
Net income attributable to Ingredion | | |||||||||||||||||||||
Net income attributable to non-controlling interests | | |||||||||||||||||||||
Dividends declared, common stock ($0.625/share) | ( | |||||||||||||||||||||
Dividends declared, non-controlling interests | ( | |||||||||||||||||||||
Repurchases of common stock | ( | |||||||||||||||||||||
Share-based compensation, net of issuance | | | | |||||||||||||||||||
Other comprehensive loss | ( | |||||||||||||||||||||
Other | ( | |||||||||||||||||||||
Balance, September 30, 2018 |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
| $ | |
| $ | |
24
Supplemental Information: The following table provides the computation of basic and diluted earnings per common share ("EPS") for the periods presented:
| Three Months Ended September 30, 2019 |
| Three Months Ended September 30, 2018 |
| |||||||||||||
(in millions, except per share amounts) |
| Net Income Available to Ingredion |
| Weighted Average Shares |
| Per Share Amount |
| Net Income Available to Ingredion |
| Weighted Average Shares |
| Per Share Amount |
| ||||
Basic EPS | $ | |
| | $ | | $ | |
| | $ | | |||||
Effect of Dilutive Securities: | |||||||||||||||||
Incremental shares from assumed exercise of dilutive stock options and vesting of dilutive RSUs and other awards |
| |
| | |||||||||||||
Diluted EPS | $ | |
| | $ | | $ | |
| | $ | |
| Nine Months Ended September 30, 2019 |
| Nine Months Ended September 30, 2018 |
| |||||||||||||
(in millions, except per share amounts) |
| Net Income Available to Ingredion |
| Weighted Average Shares |
| Per Share Amount |
| Net Income Available to Ingredion |
| Weighted Average Shares |
| Per Share Amount |
| ||||
Basic EPS | $ | |
| | $ | | $ | |
| | $ | | |||||
Effect of Dilutive Securities: | |||||||||||||||||
Incremental shares from assumed exercise of dilutive stock options and vesting of dilutive RSUs and other awards |
| |
| | |||||||||||||
Diluted EPS | $ | |
| | $ | | $ | |
| | $ | |
For the three and nine months ended September 30, 2019, approximately
13. Segment Information
The Company is principally engaged in the production and sale of starches and sweeteners for a wide range of industries, and is managed geographically on a regional basis. The Company’s operations are classified into
25
| Three Months Ended |
| Nine Months Ended | ||||||||||
September 30, | September 30, | ||||||||||||
(in millions) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||
Net sales to unaffiliated customers: | |||||||||||||
North America: | |||||||||||||
Net sales before shipping and handling costs | $ | | $ | | $ | | $ | | |||||
Less: shipping and handling costs | | | | | |||||||||
Net sales | $ | | $ | | $ | | $ | | |||||
South America: | |||||||||||||
Net sales before shipping and handling costs | $ | | $ | | $ | | $ | | |||||
Less: shipping and handling costs | | | | | |||||||||
Net sales | $ | | $ | | $ | | $ | | |||||
Asia-Pacific: | |||||||||||||
Net sales before shipping and handling costs | $ | | $ | | $ | | $ | | |||||
Less: shipping and handling costs | | | | | |||||||||
Net sales | $ | | $ | | $ | | $ | | |||||
EMEA: | |||||||||||||
Net sales before shipping and handling costs | $ | | $ | | $ | | $ | | |||||
Less: shipping and handling costs | | | | | |||||||||
Net sales | $ | | $ | | $ | | $ | |
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
(in millions) | 2019 |
| 2018 | 2019 | 2018 | ||||||||
Operating income: | |||||||||||||
North America | $ | | $ | | $ | | $ | | |||||
South America | | | | | |||||||||
Asia-Pacific | | | | | |||||||||
EMEA | | | | | |||||||||
Corporate | ( | ( | ( | ( | |||||||||
Subtotal | | | | | |||||||||
Restructuring/impairment charges | ( | ( | ( | ( | |||||||||
Acquisition/integration costs | — | — | ( | — | |||||||||
Total operating income | $ | | $ | | $ | | $ | |
As of | As of | ||||
(in millions) | September 30, 2019 |
| December 31, 2018 | ||
Total assets: | |||||
North America (a) | $ | | $ | | |
South America | | | |||
Asia-Pacific | | | |||
EMEA | | | |||
Total | $ | | $ | |
(a) | For purposes of presentation, North America includes Corporate assets. |
26
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context indicates otherwise, references to “we,” “us,” “our,” the “Company” and “Ingredion” mean Ingredion Incorporated and its consolidated subsidiaries.
Overview
We are a major supplier of high-quality food and industrial ingredient solutions to customers around the world. We have 46 manufacturing plants located in North America, South America, Asia-Pacific and Europe, the Middle East and Africa (“EMEA”), and we manage and operate our businesses at a regional level. We believe this approach provides us with a unique understanding of the cultures and product requirements in each of the geographic markets in which we operate, bringing added value to our customers. Our ingredients are used by customers in the food, beverage, brewing, and animal nutrition industries, among others.
Our new strategic growth roadmap is based on the following five growth platforms and is designed to deliver shareholder value by accelerating customer co-creation and enabling consumer-preferred innovation. Our first platform is starch-based texturizers, the second platform is clean and simple ingredients, the third platform is plant-based proteins, the fourth platform is sugar reduction and specialty sweeteners, and finally, our fifth platform is value-added food systems.
For the three months ended September 30, 2019, operating income, net income and diluted earnings per share increased from the comparable 2018 period. Our increase in earnings for the three months ended September 30, 2019, was attributable to improved price/mix and specialty volume, partially offset by foreign exchange impacts and higher raw material costs.
For the three and nine months ended September 30, 2019, we recorded $28 million and $41 million of pre-tax restructuring charges, respectively. Pre-tax restructuring charges of $14 million and $23 million were recorded for the three and nine months ended September 30, 2019, respectively, for the Cost Smart SG&A program. These costs include $8 million and $11 million, of other costs, including professional services, and $6 million and $12 million of employee-related severance for the three and nine months ended September 30, 2019, respectively. These charges were recorded primarily in our North America and South America operations, and include $1 million and $2 million of other costs associated with the Finance Transformation initiative in Latin America for the three and nine months ended September 30, 2019, respectively. We expect to continue to incur additional charges during the year related to the Cost Smart SG&A program, however, we do not expect to incur any additional restructuring costs related to the Finance Transformation initiative.
Additionally, for the three and nine months ended September 30, 2019, we recorded $14 million and $18 million, respectively, for the Cost Smart cost of sales program. During the three months ended September 30, 2019, we recorded $6 million of restructuring charges in relation to the closure of the Lane Cove, Australia production facility, consisting of $4 million of employee-related severance and $2 million of accelerated depreciation. We expect to incur an additional $10 million of restructuring costs during the remainder of 2019 and between $10 million and $12 million in 2020 in relation to the closure. Additionally, during the three months ended September 30, 2019, we recorded $4 million of employee-related expenses primarily related to the South America operations restructuring. Finally, we recorded $4 million and $8 million of other costs, including professional services, during the three and nine months ended September 30, 2019, primarily in North America including other costs of $2 million in relation to the prior year cessation of wet-milling at the Stockton, California plant. We do not expect to incur any additional costs in relation to the cessation of wet-milling at the Stockton, California plant.
Our cash provided by operating activities decreased to $490 million for the nine months ended September 30, 2019, from $579 million in the year-earlier period, primarily driven by our decrease in earnings and changes in working capital. Our cash used for financing activities was $86 million during the nine months ended September 30, 2019, compared to $497 million in the year-earlier period. This decrease was mainly driven by a reduction in repurchases of common stock and lower net payments on debt.
As previously announced on October 12, 2019, we detected suspicious activity affecting several servers within certain data centers on our network. Immediately, we took steps to identify and contain the situation, which included
27
engaging a third-party consultant, to take appropriate action to restore the affected servers to bring them back online. As of the date of this report, we are not aware of any evidence that any customer, supplier, or employee data has been improperly accessed, misused or transferred by any third party. Certain transactions with our customers or suppliers may be delayed as we restore the affected servers. We continue to assess the overall potential impact of the incident; however, we are presently not aware of any impact to our financial reporting systems and do not anticipate any material impact to our Key Financial Performance Metrics. We expect to incur costs, which we do not believe will be material, to assess the immediate impact of the incident, to address remediation efforts and to implement additional preventative measures. At this time, we continue to assess the overall control and financial impact of the incident.
Looking ahead in North America, operating income is expected to be down assuming current market conditions for corn and co-products, which have been negatively impacted by late crop plantings and delayed harvest in the U.S. and continued crop inventory imbalances arising from the U.S./China trade dispute; South America operating income is expected to be down due to the impact of macroeconomic uncertainty; Asia-Pacific operating income is expected to be down driven by foreign currency weakness, increased input costs and anticipated slower customer demand and intensified competitive pressure on price/mix; EMEA operating income is expected to be down due to foreign exchange, higher raw material cost and postponement of Brexit.
Results of Operations
We have significant operations in four reporting segments: North America, South America, Asia-Pacific and EMEA. For most of our foreign subsidiaries, the local foreign currency is the functional currency. Accordingly, revenues and expenses denominated in the functional currencies of these subsidiaries are translated into U.S. dollars at the applicable average exchange rates for the period. Fluctuations in foreign currency exchange rates affect the U.S. dollar amounts of our foreign subsidiaries’ revenues and expenses. The impact of foreign currency translation to the reporting currency, where significant, is provided below.
For the Three Months Ended September 30, 2019
With Comparatives for the Three Months Ended September 30, 2018
Three Months Ended September 30, | Favorable (Unfavorable) | Favorable (Unfavorable) | ||||||||||
(in millions) |
| 2019 |
| 2018 |
| Variance | Percentage | |||||
Net sales | $ | 1,457 | $ | 1,450 | $ | 7 | — | % | ||||
Cost of sales | 1,113 | 1,116 | 3 | — | % | |||||||
Gross profit | 344 | 334 | 10 | 3 | % | |||||||
Operating expenses | 153 | 148 | (5) | (3) | % | |||||||
Other income, net | (2) | (3) | (1) | (33) | % | |||||||
Restructuring/impairment charges | 28 | 34 | 6 | 18 | % | |||||||
Operating income | 165 | 155 | 10 | 6 | % | |||||||
Financing costs, net | 24 | 24 | — | — | % | |||||||
Other, non-operating expense/(income), net | 1 | (1) | (2) | (200) | % | |||||||
Income before income taxes | 140 | 132 | 8 | 6 | % | |||||||
Provision for income taxes | 38 | 34 | (4) | (12) | % | |||||||
Net income | 102 | 98 | 4 | 4 | % | |||||||
Less: Net income attributable to non-controlling interests | 3 | 3 | — | — | % | |||||||
Net income attributable to Ingredion | $ | 99 | $ | 95 | $ | 4 | 4 | % |
Net income attributable to Ingredion. Net income attributable to Ingredion for the three months ended September 30, 2019, increased by 4 percent to $99 million from $95 million for the three months ended September 30, 2018.
28
Results for the third quarter of 2019 include after-tax costs of $22 million of restructuring costs primarily associated with our Cost Smart cost of sales and SG&A programs and $2 million of other tax matters related to tax settlements and reversals of penalties for tax reserves. Results for the third quarter of 2018 include after-tax costs of $27 million of restructuring costs primarily associated with our Cost Smart SG&A and cost of sales programs and Finance Transformation initiative, $2 million of incremental expense for adjustments to provisional amounts related to the Tax Cuts and Jobs Act of 2017, and $2 million of interest penalty associated with the final tax settlement between the U.S. and Canada.
Net sales. Our net sales for the third quarter of 2019 of $1.5 billion increased by $7 million compared to the three months ended September 30, 2018. The increase was driven by improved price/product mix and volume growth, which were partially offset by foreign currency impacts.
Cost of sales. Cost of sales was $1.1 billion for the three months ended September 30, 2019 and 2018. Our gross profit margin was 24 percent for the three months ended September 30, 2019, up from 23 percent for the three months ended September 30, 2018. Gross profit margin improved primarily due to favorable price/product mix, which was partially offset by unfavorable foreign currency impacts and higher raw material costs.
Operating expenses. Operating expenses for the third quarter of 2019 increased to $153 million from $148 million last year. This increase was primarily driven by increased other costs, including professional services, partly offset by Cost Smart SG&A cost reduction initiatives. Operating expenses, as a percentage of net sales for the three months ended September 30, 2019 increased to 11 percent from 10 percent last year.
Financing costs, net. Financing costs for the three months ended September 30, 2019, remained flat at $24 million compared to the three months ended September 30, 2018, as the impact of Argentina highly inflationary accounting offset the benefit of lapping prior year foreign exchange losses.
Provision for income taxes. Our effective income tax rate for the third quarter of 2019 increased to 27.1 percent from 25.8 percent a year ago. The increase in the effective income tax rate was primarily driven by the devaluation of the Mexican peso impacting the U.S. dollar-denominated balances in Mexico, taxable gain related to highly inflationary accounting in Argentina and issuance by the Treasury Department of final global intangibles low-taxed income regulations under the 2017 tax reform act. This was partially offset by prior-year provision adjustments, change in mix of earnings and other individually insignificant factors.
Segment Results
North America
Three Months Ended September 30, | Favorable (Unfavorable) | Favorable (Unfavorable) | ||||||||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | ||||
Net sales to unaffiliated customers | $ | 892 | $ | 889 | $ | 3 | — | % | ||||
Operating income | 145 | 138 | 7 | 5 | % |
Net sales. Our increase in net sales of $3 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was mainly driven by improved price/product mix, partially offset by lower volume.
Operating income. Our increase in operating income of $7 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was driven by improved price/product mix and benefits from the Cost Smart savings program, partially offset by higher net corn costs.
South America
Three Months Ended September 30, | Favorable (Unfavorable) | Favorable (Unfavorable) | ||||||||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | ||||
Net sales to unaffiliated customers | $ | 234 | $ | 228 | $ | 6 | 3 | % | ||||
Operating income | 27 | 22 | 5 | 23 | % |
29
Net sales. Our increase in net sales of 3 percent for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was primarily driven by a 13 percent favorable impact from price/product mix and a 5 percent increase in volume. This was partly offset by unfavorable foreign exchange impacts of 15 percent.
Operating income. Our increase in operating income of $5 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was attributable to favorable pricing actions, volume, and benefits of the Cost Smart programs partly offset by unfavorable foreign exchange impacts.
Asia-Pacific
Three Months Ended September 30, | Favorable (Unfavorable) | Favorable (Unfavorable) | ||||||||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | ||||
Net sales to unaffiliated customers | $ | 196 | $ | 197 | $ | (1) | (1) | % | ||||
Operating income | 22 | 25 | (3) | (12) | % |
Net sales. Our decrease in net sales of 1 percent for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was primarily driven by unfavorable price/product mix of 3 percent and unfavorable exchange impacts of 1 percent. This was partly offset by favorable volumes of 3 percent.
Operating income. Our decrease in operating income of $3 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was driven by increased operating costs in Australia and the continuing impact of trade disputes, which have increased input costs and intensified competitive pressure on price/product mix.
EMEA
Three Months Ended September 30, | Favorable (Unfavorable) | Favorable (Unfavorable) | ||||||||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | ||||
Net sales to unaffiliated customers | $ | 135 | $ | 136 | $ | (1) | (1) | % | ||||
Operating income | 24 | 26 | (2) | (8) | % |
Net sales. Our decrease in net sales of 1 percent for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was primarily driven by unfavorable foreign exchange impacts of 12 percent, partly offset by a 10 percent increase in price/product mix and 1 percent increase in volume.
Operating income. Our decrease in operating income of $2 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, was due to higher corn costs and unfavorable foreign exchange impacts partially offset by strong pricing actions.
30
For the Nine Months Ended September 30, 2019
With Comparatives for the Nine Months Ended September 30, 2018
Nine Months Ended September 30, | Favorable (Unfavorable) | Favorable (Unfavorable) | ||||||||||
(in millions) |
| 2019 |
| 2018 |
| Variance | Percentage | |||||
Net sales | $ | 4,311 | $ | 4,415 | $ | (104) | (2) | % | ||||
Cost of sales | 3,322 | 3,367 | 45 | 1 | % | |||||||
Gross profit | 989 | 1,048 | (59) | (6) | % | |||||||
Operating expenses | 457 | 465 | 8 | 2 | % | |||||||
Other income, net | (3) | (7) | (4) | (57) | % | |||||||
Restructuring/impairment charges | 41 | 45 | 4 | 9 | % | |||||||
Operating income | 494 | 545 | (51) | (9) | % | |||||||
Financing costs, net | 62 | 65 | 3 | 5 | % | |||||||
Other, non-operating expense/(income), net | 1 | (3) | (4) | (133) | % | |||||||
Income before income taxes | 431 | 483 | (52) | (11) | % | |||||||
Provision for income taxes | 120 | 126 | 6 | 5 | % | |||||||
Net income | 311 | 357 | (46) | (13) | % | |||||||
Less: Net income attributable to non-controlling interests | 7 | 8 | 1 | 13 | % | |||||||
Net income attributable to Ingredion | $ | 304 | $ | 349 | $ | (45) | (13) | % |
Net income attributable to Ingredion. Net income attributable to Ingredion for the nine months ended September 30, 2019, decreased by 13 percent to $304 million from $349 million for the nine months ended September 30, 2018.
Our results for the nine months ended September 30, 2019 include after-tax restructuring charges of $32 million primarily associated with our Cost Smart cost of sales and SG&A programs and $1 million of acquisition/integration costs related to the acquisition and integration of the business acquired from Western Polymer, LLC, and $2 million of other tax matters related to tax settlements and reversals of penalties for tax reserves. Results for the nine months ended September 30, 2018 include after-tax restructuring charges of $35 million consisting primarily of net restructuring associated with the Cost Smart cost of sales and SG&A programs, other restructuring costs related to our North America finance transformation, and our leaf extraction process in Brazil.
Net sales. Our decrease in net sales of 2 percent for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was driven by unfavorable foreign currency impacts and planned Stockton HFCS and industrial starch volume shed. This was partly offset by favorable price/product mix due to pricing actions,
Cost of sales. Cost of sales for the nine months ended September 30, 2019, decreased to $3.3 billion from $3.4 billion for the nine months ended September 30, 2018. Our gross profit margin was 23 percent for the nine months ended September 30, 2019, down from 24 percent compared to the nine months ended September 30, 2018. The gross profit margin decreased primarily due to unfavorable foreign exchange impacts and higher raw material and production costs, partially offset by improved price/mix.
Operating expenses. Our operating expenses decreased 2 percent to $457 million for the nine months ended September 30, 2019, as compared to $465 million for the nine months ended September 30, 2018. The decrease was primarily driven by favorable expenses as a result of Cost Smart SG&A cost reduction initiatives and by the impact of foreign exchange impacts on operating expenses partly offset by other expenses, including professional services. Operating expenses, as a percentage of net sales, were flat at 11 percent for the nine months ended September 30, 2019 and 2018.
31
Financing costs, net. Financing costs for the nine months ended September 30, 2019, decreased to $62 million from $65 million for the nine months ended September 30, 2018, primarily due to the benefit of lapping prior year foreign-exchange offset by losses attributable to the impact of Argentina highly inflationary accounting.
Provision for income taxes. The effective income tax rate for the nine months ended September 30, 2019, was 27.8 percent compared to 26.1 percent a year ago. The increase in the effective income tax rate was driven by a reduced excess tax benefit related to share-based payment awards and a taxable gain related to highly inflationary accounting in Argentina, partially offset by other individually insignificant factors.
Segment Results
North America
Nine Months Ended September 30, | Favorable (Unfavorable) | Favorable (Unfavorable) | ||||||||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | ||||
Net sales to unaffiliated customers | $ | 2,637 | $ | 2,679 | $ | (42) | (2) | % | ||||
Operating income | 409 | 431 | (22) | (5) | % |
Net sales. Our decrease in net sales of 2 percent for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was driven by lower volume partly offset by improved price/product mix.
Operating income. Our operating income decreased $22 million for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was driven by higher inventory and production costs, higher net corn costs due to lower co-product values, and a modest impact from extreme weather in the U.S. and Canada.
South America
Nine Months Ended September 30, | Favorable (Unfavorable) | Favorable (Unfavorable) | ||||||||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | ||||
Net sales to unaffiliated customers | $ | 667 | $ | 709 | $ | (42) | (6) | % | ||||
Operating income | 61 | 68 | (7) | (10) | % |
Net sales. Our net sales decreased 6 percent for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was primarily due to unfavorable foreign exchange impacts of 20 percent, partly offset by a 14 percent favorable impact from price/product mix.
Operating income. Our decrease in operating income of $7 million for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, due to foreign exchange impacts and higher input costs were partially offset by favorable pricing actions.
Asia-Pacific
Nine Months Ended September 30, | Favorable (Unfavorable) | Favorable (Unfavorable) | ||||||||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | ||||
Net sales to unaffiliated customers | $ | 585 | $ | 592 | $ | (7) | (1) | % | ||||
Operating income | 65 | 75 | (10) | (13) | % |
Net sales. Our net sales decreased 1 percent for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, primarily driven by unfavorable foreign exchange impacts of 3 percent partially offset by a 2 percent improvement in price/product mix.
Operating income. Our operating income decreased $10 million for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Specialty volume growth and improved price/mix were more than offset by higher regional input costs, foreign exchange impacts, and increased operating costs in Australia.
32
EMEA
Nine Months Ended September 30, | Favorable (Unfavorable) | Favorable (Unfavorable) | ||||||||||
(in millions) |
| 2019 |
| 2018 |
| Variance |
| Percentage | ||||
Net sales to unaffiliated customers | $ | 422 | $ | 435 | $ | (13) | (3) | % | ||||
Operating income | 71 | 86 | (15) | (17) | % |
Net sales. Our net sales decreased 3 percent for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. The decrease was primarily due to unfavorable foreign exchange impacts of 13 percent, partially offset by an increase in price/product mix of 7 percent and volume growth of 3 percent.
Operating income. Our operating income decreased $15 million for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, due to unfavorable foreign exchange impacts, driven primarily by the Pakistan rupee, and higher raw material costs were partially offset by specialty volume growth and improved price/product mix.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended September 30, 2019 was $490 million, as compared to $579 million for the nine months ended September 30, 2018. The decrease in operating cash flow primarily reflects a decrease in our net income and the changes in our working capital. The year-to-date change in working capital includes a benefit of an overpayment of $77 million received by the Company on September 30, 2019 by the transacting bank on a currency hedge. The transacting bank settled the currency hedge gross and remitted payment to the Company for the full notional value of the hedge instead of settling net with the Company and the counter-party. The impact resulted in an increase to our cash provided from Accounts payable and accrued liabilities. On October 1, 2019 the Company immediately settled with the counter-party by remitting the overpayment. This cash outflow on October 1, 2019 will impact our fourth quarter cash provided by operating activities.
Capital expenditures and mechanical stores purchases of $231 million for the nine months ended September 30, 2019 are in line with our capital spending plan for the year. We anticipate that our capital expenditures and mechanical stores purchases will be approximately $335 million to $355 million for 2019.
As of December 31, 2018, we had total debt outstanding of $2.1 billion. As of September 30, 2019, our total debt consists of the following:
(in millions) |
|
| ||
3.2% senior notes due October 1, 2026 |
| $ | 497 | |
4.625% senior notes due November 1, 2020 | 400 | |||
6.625% senior notes due April 15, 2037 | 253 | |||
5.62% senior notes due March 25, 2020 | 200 | |||
Term loan credit agreement due April 12, 2021 | 500 | |||
Revolving credit facility | 149 | |||
Fair value adjustment related to hedged fixed rate debt instruments | 2 | |||
Long-term debt | 2,001 | |||
Short-term borrowings | 81 | |||
Total debt | $ | 2,082 |
On April 12, 2019, we amended and restated the Term Loan Credit Agreement set to mature on April 25, 2019 (“Term Loan”) of $165 million to establish a 24-month senior unsecured term loan credit facility (“Amended Term Loan”) in an amount up to $500 million that matures on April 12, 2021. We used the $500 million to pay down our revolving credit facility (“Revolving Credit Facility”) and to pay off the Term Loan balance. As of September 30, 2019, there were borrowings of $500 million outstanding under the Amended Term Loan and borrowings of $149 million outstanding under the Revolving Credit Facility.
Our long-term debt as of September 30, 2019, includes the 5.62% senior notes due March 25, 2020, as we have the ability and intent to refinance such senior notes on a long-term basis using our Revolving Credit Facility or other sources prior to the maturity date. In addition to the approximately $850 million of borrowings availability under the Revolving Credit Facility, we have approximately $565 million of unused operating lines of credit in the various foreign
33
countries in which we operate. We are required under our credit facilities not to exceed a maximum leverage ratio and to maintain a minimum interest coverage ratio. As of September 30, 2019, we were in compliance with both of these financial covenants.
The weighted average interest rate on our total indebtedness was approximately 4.4 percent for the nine months ended September 30, 2019, compared to 4.8 percent in the nine months ended September 30, 2018.
On September 18, 2019, our Board of Directors declared a quarterly cash dividend of $0.63 per share of common stock. This dividend was paid on October 25, 2019, to stockholders of record at the close of business on October 1, 2019.
We currently expect that our available cash balances, future cash flow from operations, access to debt markets, and borrowing capacity under our credit facilities will provide us with sufficient liquidity to fund our anticipated capital expenditures, dividends and other investing and financing activities for the foreseeable future.
We have not provided foreign withholding taxes, state income taxes, and federal and state taxes or foreign currency gains/losses on accumulated undistributed earnings of certain foreign subsidiaries because these earnings are considered to be permanently reinvested. It is not practicable to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings. We do not anticipate the need to repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. Approximately $342 million of the total $443 million of cash and cash equivalents and short-term investments at September 30, 2019 was held by our operations outside of the U.S. We expect that available cash balances and credit facilities in the U.S., along with cash generated from operations and our access to debt markets, will be sufficient to meet our operating and other cash needs for the foreseeable future.
Hedging and Financial Risk
Hedging: We are exposed to market risk stemming from changes in commodity prices (primarily corn and natural gas), foreign-currency exchange rates and interest rates. In the normal course of business, we actively manage our exposure to these market risks by entering into various hedging transactions, authorized under established policies that place clear controls on these activities. These transactions utilize exchange-traded derivatives or over-the-counter derivatives with investment grade counterparties. Our hedging transactions may include, but are not limited to, a variety of derivative financial instruments such as commodity-related futures, options and swap contracts, forward currency-related contracts and options, interest rate swap agreements and Treasury lock agreements (“T-Locks”). See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information.
Commodity Price Risk: Our principal use of derivative financial instruments is to manage commodity price risk in North America relating to anticipated purchases of corn and natural gas to be used in our manufacturing process. We periodically enter into futures, options and swap contracts for a portion of our anticipated corn and natural gas usage, generally over the following 12 to 24 months, in order to hedge price risk associated with fluctuations in market prices. We also enter into futures contracts to hedge price risk associated with fluctuations in the market price of ethanol. We are unable to directly hedge price risk related to co-product sales; however, we occasionally enter into hedges of soybean oil (a competing product to our corn oil) in order to mitigate the price risk of corn oil sales. Unrealized gains and losses associated with marking our commodities-based cash flow hedge derivative instruments to market are recorded as a component of other comprehensive income (“OCI”). As of September 30, 2019, our accumulated other comprehensive income account (“AOCI”) included $17 million of net losses (net of income tax benefit of $6 million) related to these derivative instruments. It is anticipated that $14 million of net losses (net of income tax benefit of $5 million) will be reclassified into earnings during the next 12 months. We expect the net losses to be offset by changes in the underlying commodities costs.
34
Foreign-Currency Exchange Risk: Due to our global operations, including operations in many emerging markets, we are exposed to fluctuations in foreign-currency exchange rates. As a result, we have exposure to translational foreign-exchange risk when our foreign operations’ results are translated to U.S. dollars and to transactional foreign-exchange risk when transactions not denominated in the functional currency of the operating unit are revalued. We primarily use derivative financial instruments such as foreign-currency forward contracts, swaps and options to manage our foreign currency transactional exchange risk. We enter into foreign-currency derivative instruments that are designated as both cash flow hedging instruments as well as instruments not designated as hedging instruments as defined by ASC 815, Derivatives and Hedging. As of September 30, 2019, we had foreign-currency forward sales contracts with an aggregate notional amount of $599 million and foreign currency forward purchase contracts with an aggregate notional amount of $182 million not designated as hedging instruments.
As of September 30, 2019, we had foreign-currency forward sales contracts with an aggregate notional amount of $426 million and foreign-currency forward purchase contracts with an aggregate notional amount of $593 million designated as cash flow hedging instruments. The amount included in AOCI relating to these hedges at September 30, 2019, was $3 million of net gains (net of income tax expense of $1 million). It is anticipated that $3 million of net gains (net of income tax expense of $1 million) will be reclassified into earnings during the next 12 months.
We have significant operations in Argentina. In the second quarter of 2018, the Argentine peso rapidly devalued relative to the U.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation in that country exceeded 100 percent as of June 30, 2018. As a result, we elected to adopt highly inflationary accounting as of July 1, 2018 for our affiliate, Ingredion Argentina S.A. Under highly inflationary accounting, our affiliate’s functional currency is the U.S. dollar, and its income statement and balance sheet are measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on Argentine-peso-denominated monetary assets and liabilities are reflected in earnings in financing costs.
Interest Rate Risk: We occasionally use interest rate swaps and T-Locks to hedge our exposure to interest rate changes, to reduce the volatility of our financing costs, or to achieve a desired proportion of fixed versus floating rate debt, based on current and projected market conditions. We did not have any T-Locks outstanding as of September 30, 2019.
As of September 30, 2019, our AOCI account included $1 million of net losses (net of income tax benefit of $1 million) related to settled T-Locks. These deferred losses are being amortized to financing costs over the terms of the senior notes with which they are associated. It is anticipated that $1 million of these net losses (net of an insignificant amount of taxes) will be reclassified into earnings during the next 12 months.
As of September 30, 2019, we have an interest rate swap agreement that effectively converts the interest rates on $200 million of our $400 million of 4.625% senior notes due November 1, 2020, to variable rates. This swap agreement calls for us to receive interest at the fixed coupon rate of the respective notes and to pay interest at a variable rate based on the six-month U.S. dollar LIBOR plus a spread. We have designated this interest rate swap agreement as a hedge of the changes in fair value of the underlying debt obligation attributable to changes in interest rates and account for it as a fair value hedge. The fair value of the interest rate swap agreement as of September 30, 2019 was a $2 million gain, and is reflected in the Condensed Consolidated Balance Sheets within Other assets, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligations.
Key Financial Performance Metrics
We use certain key financial metrics to monitor our progress towards achieving our long-term strategic business objectives. In addition to the key financial metrics listed in our 2018 Form 10-K, as of January 2019, we have added the financial metric, Return on Invested Capital (“ROIC”). ROIC is a measure of the profitability and value-creating potential that considers the amount of initial capital invested. In 2019, fifty percent of the current year performance share awards granted from our Stock Incentive Plan are based on this metric. The performance share awards are more fully described in Note 12 of the Notes to the Condensed Consolidated Financial Statements.
The table below includes certain information (including adjusted operating income, net of tax and Net Debt) that is not calculated in accordance with GAAP. Management uses non-GAAP financial measures internally for strategic decision-making, forecasting future results and evaluating current performance. By disclosing non-GAAP financial measures, management intends to provide a more meaningful, consistent comparison of our operating results and trends for the periods presented. These non-GAAP financial measures are used in addition to and in conjunction with results
35
presented in accordance with GAAP and reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.
Non-GAAP financial measures are not prepared in accordance with GAAP; therefore, the information is not necessarily comparable to similarly titled non-GAAP financial measures of other companies. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP.
Return on Invested Capital (dollars in millions) | 2018 | 2017 | ||||
Adjusted operating income, net of tax (a) | $ | 569 | $ | 627 | ||
Net Debt | 1,766 | 1,260 | ||||
Equity and share-based payments subject to redemption | 2,445 | 2,953 | ||||
Total Net Debt and Equity | $ | 4,211 | $ | 4,213 | ||
Average current and prior year Net Debt and Equity (b) | $ | 4,212 | $ | 4,139 | ||
Return on Invested Capital (a ÷ b) | 13.5% | 15.1% |
The following table presents a reconciliation of adjusted operating income, net of tax, to the most comparable GAAP financial measure:
2018 | 2017 | |||||
Operating income | $ | 703 | $ | 836 | ||
Adjusted for: | ||||||
Impairment/restructuring charges | 64 | 38 | ||||
Acquisition/integration costs | — | 4 | ||||
Charge for fair value mark-up of acquired inventory | — | 9 | ||||
Insurance settlement | — | (9) | ||||
Adjusted operating income | 767 | 878 | ||||
Income taxes (at effective tax rates of 25.8% and 28.6%, respectively)* |
| (198) |
| (251) | ||
Adjusted operating income, net of tax | $ | 569 | $ | 627 |
*The effective income tax rate for 2018 and 2017 excludes the impacts of impairment/restructuring charges, acquisition and integration related costs, sale of acquiree inventory that was adjusted to fair value at the acquisition date, income tax reform, and an insurance settlement. Including these items, our effective income tax rate for 2018 and 2017 was 26.9 percent and 30.8 percent, respectively. Listed below is a schedule that reconciles the adjusted income tax rate to our effective income tax rate under GAAP:
Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||||
(dollars in millions) |
| Income before Income Taxes |
| Provision for Income Taxes | Effective Income Tax Rate | Income before Income Taxes |
| Provision for Income Taxes | Effective Income Tax Rate | |||||||
As reported | $ | 621 | $ | 167 | 26.9% | $ | 769 | $ | 237 | 30.8% | ||||||
Add back (deduct): | ||||||||||||||||
Income tax settlement | — | — | — | 10 | ||||||||||||
Impairment/restructuring charges |
| 64 |
| 13 |
| 38 |
| 7 | ||||||||
Acquisition/integration costs |
| — |
| — |
| 4 |
| 1 | ||||||||
Charge for fair value mark-up of acquired inventory |
| — |
| — |
| 9 |
| 3 | ||||||||
Insurance settlement |
| — |
| — |
| (9) |
| (3) | ||||||||
Income tax reform |
| — | (3) |
| — | (23) | ||||||||||
Adjusted non-GAAP | $ | 685 | $ | 177 | 25.8% | $ | 811 | $ | 232 | 28.6% |
The following table presents a reconciliation of Net Debt to the most comparable GAAP financial measure:
2018 | 2017 | |||||
Short-term debt | $ | 169 | $ | 120 | ||
Long-term debt | 1,931 | 1,744 | ||||
Less: Cash and cash equivalents | (327) | (595) | ||||
Short-term investments | (7) | (9) | ||||
Total Net Debt | $ | 1,766 | $ | 1,260 |
36
ROIC: Our long-term objective is to maintain a ROIC in excess of our cost of capital. For the year 2018, we achieved a ROIC of 13.5%. The ratio is calculated by dividing adjusted operating income, net of tax by the book value of both Net Debt and Equity. The decrease in ROIC percent is primarily a result of lower operating income in 2018.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018. See Note 2 of the Notes to the Condensed Consolidated Financial Statements for additional information regarding our significant accounting policies. There have been no other changes to our critical accounting policies and estimates during the three and nine months ended September 30, 2019.
37
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends these forward-looking statements to be covered by the safe harbor provisions for such statements.
Forward-looking statements include, among other things, any statements regarding the Company’s future financial condition, earnings, revenues, tax rates, capital expenditures, cash flows, expenses or other financial items, any statements concerning the Company’s prospects or future operations, including management’s plans or strategies and objectives therefor, and any assumptions, expectations or beliefs underlying the foregoing.
These statements can sometimes be identified by the use of forward-looking words such as “may,” “will,” “should,” “anticipate,” “assume,” “believe,” “plan,” “project,” “estimate,” “expect,” “intend,” “continue,” “pro forma,” “forecast,” “outlook,” “propels,” “opportunities,” “potential,” “provisional,” or other similar expressions or the negative thereof. All statements other than statements of historical facts in this report or referred to in this report are “forward-looking statements.”
These statements are based on current circumstances or expectations, but are subject to certain inherent risks and uncertainties, many of which are difficult to predict and are beyond our control. Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, investors are cautioned that no assurance can be given that our expectations will prove correct.
Actual results and developments may differ materially from the expectations expressed in or implied by these statements, based on various factors, including changing consumption preferences including those relating to high fructose corn syrup; the effects of global economic conditions, including, particularly, economic, currency and political conditions in South America, trade relations between the United States and China, and economic and political conditions in Europe, and their impact on our sales volumes and pricing of our products; our ability to collect our receivables from customers and our ability to raise funds at reasonable rates; future financial performance of major industries which we serve, including, without limitation, the food, beverage, paper and corrugated, and brewing industries; fluctuations in worldwide markets for corn and other commodities, and the associated risks of hedging against such fluctuations; genetic and biotechnology issues; our ability to develop or acquire new products and services at rates or of qualities sufficient to meet expectations; availability of raw materials, including corn, including the impact of recent excess precipitation in the U.S. corn-planting season, potato starch, tapioca, gum Arabic and also the specific varieties of corn upon which some of our products are based; fluctuations in the markets and prices for our co-products; fluctuations in aggregate industry supply and market demand; the behavior of financial markets, including foreign currency fluctuations and fluctuations in interest and exchange rates; volatility and turmoil in the capital markets; the commercial and consumer credit environment; general political, economic, business, market and weather conditions in the various geographic regions and countries in which we buy our raw materials or manufacture or sell our products; energy costs and availability; freight and shipping costs; and changes in regulatory controls regarding quotas; tariffs, duties, taxes and income tax rates, particularly United States tax reform enacted in 2017; operating difficulties; energy issues in Pakistan; boiler reliability; our ability to effectively integrate and operate acquired businesses; our ability to achieve budgets and to realize expected synergies; our ability to achieve expected savings under our Cost Smart program; our ability to complete planned maintenance and investment projects successfully and on budget; labor disputes; increased competitive and/or customer pressure in the corn-refining industry; and the outbreak or continuation of serious communicable disease or hostilities including acts of terrorism. Our forward-looking statements speak only as of the date on which they are made and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of the statement as a result of new information or future events or developments. If we do update or correct one or more of these statements, investors and others should not conclude that we will make additional updates or corrections. For a further description of these and other risks, see “Risk Factors” and other information included in our Annual Report on Form 10-K for the year ended December 31, 2018 and subsequent reports on Forms 10-Q and 8-K.
38
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion set forth in Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk at pages 31 to 32 in our Annual Report on Form 10-K for the year ended December 31, 2018, for a discussion as to how we address risks with respect to interest rates, raw material and energy costs and foreign currencies. There have been no material changes in the information that would be provided with respect to those disclosures from December 31, 2018 to September 30, 2019. For additional information, also see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Hedging and Financial Risk” in this report.
ITEM 4
CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and our Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2019. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures (a) are effective in providing reasonable assurance that all information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, has been recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting during the three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
39
PART II OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
Our subsidiary, National Starch and Chemical (Thailand) Co. Ltd., self-reported to the Rayong Provincial Department of Industry of the Ministry of Industry (the “DIW”) an administrative error in registering one of its waste transporters in Thailand. The DIW notified National Starch and Chemical (Thailand) Co. Ltd. of failure to comply with Section 8 (5) of the Factory Act in connection with the waste transporter and, in May 2019, imposed fines on a per shipment basis totaling THB 3,330,000, or approximately $107,000. There was no assertion by the DIW or the Ministry of Industry that any harm had been caused to the environment. The fines were paid in May 2019 and this administrative error is not expected to reoccur.
We are currently subject to claims and suits arising in the ordinary course of business, including labor matters, certain environmental proceedings, and other commercial claims. We also routinely receive inquiries from regulators and other government authorities relating to various aspects of our business, including with respect to compliance with laws and regulations relating to the environment, and at any given time, we have matters at various stages of resolution with the applicable governmental authorities. The outcomes of these matters are not within our complete control and may not be known for prolonged periods of time. We do not believe that the results of currently known legal proceedings and inquires will be material to us. There can be no assurance, however, that such claims, suits or investigations or those arising in the future, whether taken individually or in the aggregate, will not have a material adverse effect on our financial condition or results of operations.
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities:
|
|
|
| Maximum Number |
| ||||
(or Approximate |
| ||||||||
Total Number of | Dollar Value) of |
| |||||||
Total | Average | Shares Purchased as | Shares That May Yet |
| |||||
Number | Price | Part of Publicly | be Purchased Under |
| |||||
of Shares | Paid | Announced Plans or | the Plans or Programs |
| |||||
(shares in thousands) | Purchased | per Share | Programs | at End of Period |
| ||||
July 1 – July 31, 2019 |
| — |
| — |
| — |
| 5,855 shares | |
August 1 – August 31, 2019 |
| — |
| — |
| — |
| 5,855 shares | |
September 1 – September 30, 2019 | — |
| — |
| — | 5,855 shares | |||
Total |
| — |
| — |
| — |
On December 12, 2014, the Board of Directors authorized a stock repurchase program permitting us to purchase up to 5.0 million shares of our outstanding common stock from January 1, 2015, through December 31, 2019. On October 22, 2018, the Board of Directors authorized a new stock repurchase program permitting us to purchase up to an additional 8.0 million shares of our outstanding common stock from November 5, 2018, through December 31, 2023. As of September 30, 2019, we have 5.9 million shares available for repurchase under the stock repurchase programs.
40
ITEM 6
EXHIBITS
a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto.
All other items hereunder are omitted because either such item is inapplicable or the response is negative.
EXHIBIT INDEX
Number | Description of Exhibit | |
31.1 | CEO Section 302 Certification Pursuant to the Sarbanes-Oxley Act of 2002 | |
31.2 | CFO Section 302 Certification Pursuant to the Sarbanes-Oxley Act of 2002 | |
32.1 | ||
32.2 | ||
101 | The following financial information from Ingredion Incorporated’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019 formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) the Condensed Consolidated Statements of Income; (ii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Balance Sheets; (iv) the Condensed Consolidated Statements of Equity and Redeemable Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) the Notes to the Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and embedded within Exhibit 101) |
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INGREDION INCORPORATED | |||
DATE: | November 6, 2019 | By | /s/ James D. Gray |
James D. Gray | |||
Executive Vice President and Chief Financial Officer | |||
DATE: | November 6, 2019 | By | /s/ Stephen K. Latreille |
Stephen K. Latreille | |||
Vice President and Corporate Controller |
42